CONTRACTING CONTRACTING CONTRACTING CONTRACTING CONTRACTING
FOR FOR FOR FOR FOR
HEAL HEAL HEAL
HEAL HEALTH TH TH TH TH SERVICES SERVICES SERVICES SERVICES SERVICES
LES LES LES
LES LESSONS FROM SONS FROM SONS FROM SONS FROM SONS FROM
NEW ZEALAND NEW ZEALAND NEW ZEALAND NEW ZEALAND NEW ZEALAND
WORLD HEALTH ORGANIZATION
REGIONAL OFFICE FOR THE WESTERN PACIFIC
CONTRACTING CONTRACTING CONTRACTING CONTRACTING CONTRACTING
FOR HEAL FOR HEAL FOR HEAL FOR HEAL
FOR HEALTH TH TH TH TH SERVICES SERVICES SERVICES SERVICES SERVICES
LESSONS FROM NEW ZEALAND LESSONS FROM NEW ZEALAND LESSONS FROM NEW ZEALAND LESSONS FROM NEW ZEALAND LESSONS FROM NEW ZEALAND
WORLD HEALTH ORGANIZATION
REGIONAL OFFICE FOR THE WESTERN PACIFIC
2004
WHO Cataloguing-in Publications Data
Contracting for health services: lessons from New Zealand 1. Contracting services. 2. Health services -- New Zealand ISBN 92 9061 067 0 (NLM Classification: W 74)
© World Health Organization 2004 All rights reserved.
The designations employed and the presentation of the material in this publication do not imply the expression of any opinion whatsoever on the part of the World Health Organization concerning the legal status of any country, territory, city or area or of its authorities, or concerning the delimitation of its frontiers or boundaries. Dotted lines on maps represent approximate border lines for which there may not yet be full agreement.
The mention of specific companies or of certain manufacturers’ products does not imply that they are endorsed or recommended by the World Health Organization in preference to others of a similar nature that are not mentioned. Errors and omissions excepted, the names of proprietary products are distinguished by initial capital letters.
The World Health Organization does not warrant that the information contained in this publication is complete and correct and shall not be liable for any damages incurred as a result of its use.
Publications of the World Health Organization can be obtained from Marketing and Dissemination, World Health Organization, 20 Avenue Appia, 1211 Geneva 27, Switzerland (tel: +41 22 791 2476; fax: +41 22 791 4857; email: bookorders@who.int).
Requests for permission to reproduce WHO publications, in part or in whole, or to translate them – whether for sale or for noncommercial distribution - should be addressed to Publications, at the above address (fax: +41 22 791 4806; email:
permissions@who.int).
The views expressed in this document are solely the responsibility of the named authors and do not necessarily reflect the policy of the World Health Organization nor necessarily the policy or views of the New Zealand Government, the New Zealand Ministry of Health or other institutions. The World Health Organization does not warrant that the information contained in this publication is complete and shall not be liable for any damages incurred as a result of its use.
T T T
T TABLE OF ABLE OF ABLE OF ABLE OF ABLE OF CONTENTS CONTENTS CONTENTS CONTENTS CONTENTS
Foreword 1
Acknowledgements 3
Key points 5
Introduction 7
Abbreviations 9
Glossary of key terms 13
Chapter 1 Country context 15
1.1 Background 15
1.2 Organization of health services before 1993 16
1.3 The 1993 reforms 19
1.4 Adjustments in 1997-1998 21
1.5 Reforms of 2000 22
Chapter 2 The contracting process 23
2.1 Introduction 23
2.2 The legal framework for contracting 23
2.3 Purchasing methods 27
2.4 Setting prices 32
2.5 Contestable purchasing strategies 32
2.6 Changing providers 35
2.7 Developing contracting skills and knowledge 36
2.8 Costs of contracting 37 2.9 Legal problems and issues surrounding the
contracting process 39
Key points from chapter 2 42
Chapter 3 Contract content and form 45
3.1 Content of contracts 45
3.2 Form of contracts 46
3.3 Specification of services 47
3.4 Quality measures 50
3.5 Response to Crown objectives 50
3.6 Duration of contracts 51
Key points from chapter 3 53
Chapter 4 Purchaser/provider relationships 55
4.1 Nature of relationships 55
4.2 Sources of tension 56
4.3 Litigation 58
4.4 Factors that alleviated tensions 60 4.5 Changes in relationships over time 61 4.6 The importance of good relationships 62
Key points from chapter 4 62
Chapter 5 Monitoring and accountability 65
5.1 Introduction 65
5.2 Approaches to monitoring 66
5.3 From monitoring to accountability 69 5.4 Role of contracts in holding providers to account 70 5.5 Accountability from the consumer’s perspective 71
Key points from chapter 5 71
Chapter 6 Summary and conclusions 73
Appendix methods 77
References 79
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Lessons from New Zealand
Health is complex and multidimensional. As we learn more about factors that are associated with health and ill- health, our need to be able to draw on the knowledge and skills in different fields also increases.
This is reflected in the development and operation of health systems. To ensure that these complex systems work well and that services are able to be delivered equitably, safely, efficiently and effectively to meet people’s needs, we must engage the knowledge and skills of an increasing array of different disciplines. As part of this, publicly owned and funded health systems are now struggling with combining more modern approaches to public management into their systems and with managing an increasing array of participants, both public and private. Therefore, many different mechanisms and tools are being used to try to ensure the effective and safe delivery of health services.
Contracting is one of those tools, and it is playing an increasing role in many health systems. Not only is it being used within the private sector, but it is also being used by the public sector to make effective use of the private sector, as well as within the public sector between purchasing agencies and the providers of services.
Although contracting has the potential to add benefits to health systems, it also adds further complexity. Health professionals and health sector managers need to develop new skills and to understand areas with which few have concerned themselves in the past, particularly in relation to the legal aspects of contracts.
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FF FF OREWORD OREWORD OREWORD OREWORD OREWORD
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Contracting for health servicesWe are therefore pleased to be able to share this research report, in the hope that the experience that New Zealand has gained and the lessons that were learned in the application of contracting throughout their health sector can benefit other countries that may also be considering the use of contracts in their health systems.
Shigeru Omi, M.D., Ph.D Regional Director
WHO Regional Office for the Western Pacific
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Lessons from New Zealand
T
his publication was written by Toni Ashton (Director, Centre for Health Services Research and Policy, University of Auckland), Jackie Cumming (Director, Health Services Research Centre, Victoria University of Wellington), Janet McLean (Senior Lecturer, Faculty of Law, University of Auckland), Malcolm McKinlay (Research Fellow, Centre for Health Services Research and Policy, University of Auckland) and Ezrai Fae (MPP student, Victoria University of Wellington).This work was made possible through extrabudgetary contribution to the World Health Organization from the Government of Japan.
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A A CKNOWLEDGEMENTS CKNOWLEDGEMENTS CKNOWLEDGEMENTS CKNOWLEDGEMENTS CKNOWLEDGEMENTS
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Contracting for health services55555
Lessons from New Zealand
• Contracting has become a central part of the management of the health system in New Zealand, particularly since the introduction of the purchaser/
provider split in 1993.
• The contracting process improved focus on costs and volumes; led to greater clarity through specification of services; encouraged providers to focus on methods to improve quality; and enabled new styles of service provision from providers that had not traditionally received public funds for health services.
• On the other hand, the legal framework encouraged an adversarial approach, and there were high transaction costs associated with contracting, particularly in the early years when there were four regional public purchasers with different contracting and monitoring processes. A lack of good information, especially on costs and volumes, and quality, made monitoring and accountability more difficult.
• Competition between providers was limited. Some private providers argued that it was difficult for them to win contracts because (a) they did not have information about the risk profile of patients previously treated in the public sector, and (b) the government did not want to undermine the financial viability of public providers.
• The regulatory environment was complex.
Competition law concerns were often at odds with other objectives and interests of patients were often under-represented in contractual processes.
K K K
K K EY EY EY EY EY POINTS POINTS POINTS POINTS POINTS
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Contracting for health services• In relation to contract content and form, development of a standard set of terms and conditions under a national purchasing framework made contracting simpler and less costly.
Specification of services also became more detailed and, although costly, was regarded as a good investment for understanding service delivery.
Language changed to become more simple over time.
• The duration of contracts increased over time; but the ability of purchasers to negotiate long-term contracts was limited by competition law and the existence of annual funding agreements between the Minister and purchasers.
• The inclusion of quality measures in contracts contributed towards the development of a culture of quality in service provision.
• In terms of relationships, purchasers were widely regarded as having the greater power; and purchasers and providers consistently interpreted their relationships differently. However, over time they worked more closely together and relationships generally improved. Good relationships are seen as the key to successful contracting. However, development of effective relationships could be seriously interrupted by continual organizational restructuring and changes in key personnel.
• A variety of approaches were used to monitor contract performance. Providers expressed concerns over the quantity of information required by purchasers and a view that information provided disappeared into a black hole. Purchasers considered that good relationships with providers were as important in ensuring contract performance as any formal contract monitoring arrangement.
• The ability to hold providers to account was affected by the political and market environments in which contracting takes place. The overall approach to contracting, the degree of competition, the financial position of providers and the commitment of politicians in a public system will all affect the role of contracts in improving accountability.
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Lessons from New Zealand
I
n the last decade of the last century, New Zealand initiated substantial reforms within its health sector.The planning for the most significant of these reforms commenced in 1991, when a ministerial taskforce recommended the restructuring of the public health sector to establish “buyers” and “sellers” through the separation of the roles of purchasing and providing services (that is, a purchaser-provider “split”), using contracts to secure services. The main objectives of the restructuring were to improve the efficiency, flexibility and innovation of health care delivery; reduce waiting times, and widen the choice of hospitals and health services for consumers (Upton 1991). The reforms were in line with the market-oriented reforms that had been taking place in the wider New Zealand economy.
These health reforms were implemented in 1993 and contracting became a central part of the management of the health system in New Zealand. Although the use of contracts in the sector had started in earlier periods, as a result of these reforms contracts were used much more extensively and became the main mechanism for buying services using public funds, irrespective of whether the provider of the services was publicly-owned or private.
It is worth recognizing that this report primarily focuses on the ten year period 1990-2000, when the use of contracts in the New Zealand health system was most extensive, particularly within the public health system. Readers should understand that since this time, a change in government has resulted in a further restructuring of the health sector, with the establishment of local District Health Boards responsible for organising health care in their districts. More general service agreements are used between the Minister and the District Health Boards, but the formal purchaser-provider
IIIII NTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION NTRODUCTION
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Contracting for health servicessplit has been removed for secondary care services delivered by publicly-owned hospitals. This has resulted in much reduced use of contracts as formal mechanisms within the public sector. Contracting remains between District Health Boards and community-based providers, including primary care providers, although the contracting approach that will be used by these Boards has not yet been fully developed.
Despite these recent changes, the experience that New Zealand has gained during this earlier period is worth studying, in order to identify lessons that may be of value to others.
This report focuses on (a) contracts, rather than sub- contracts, and (b) contracts for clinical services rather than for either non-clinical services or for components of services.
Information in this report comes primarily from three separate sets of interviews with key contracting personnel, covering both purchasers and providers. A brief summary of these three sources of information is provided in the annex on methods on page 77.
As a final point, it is important to note that the New Zealand health system, like all health systems, has a history and country context and a number of specific organizational names and other terms. Some knowledge of these factors is necessary in order to understand more fully the analysis of the issues presented in this report. Readers are therefore urged to first read through the list of abbreviations (page 9), the glossary of key terms (page 13), and the country health system context in chapter 1 (page 15), before being tempted to delve directly into specific sections of this report.
A more comprehensive understanding of the issues will be gained if the report is read in the order presented.
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Lessons from New Zealand ACC
Accident Compensation Corporation. ACC is the state-owned insurer that administers New Zealand’s accident compensation scheme that provides 24- hour no-fault personal accident insurance cover for all New Zealand citizens, residents and temporary visitors to New Zealand. Part of ACC’s role is to buy health and disability support services to treat, care for and rehabilitate eligible injured people.
(Further information: http://www.acc.org.nz ) AHBs
Area Health Boards. Prior to 1993 when they were disestablished, fourteen AHBs were provided with block budgets to provide secondary and tertiary services and public health services for the people within their geographic areas.
CCMAU
The Crown Company Monitoring Advisory Unit – responsible for monitoring the performance of Crown Health Enterprises (CHEs). As part of the most recent reforms, on 1 August 2000 CCMAU’s health ownership monitoring functions were transferred to the Ministry of Health. (Further information:
http://www.ccmau.govt.nz) CHEs
Crown Health Enterprises. State-owned organizations established in 1993 which provided hospital-based services, a selection of community- based services and (sometimes) a range of public health services. Renamed hospital and health services (HHSs) in 1997.
A A A
A A BBREVIA BBREVIA BBREVIATIONS BBREVIA BBREVIA TIONS TIONS TIONS TIONS
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Contracting for health servicesDRGs
Diagnosis related groups. A measure of case mix in which hospital episodes of care are classified according to their expected resource use.
DHBs
District Health Boards. Each of the 21 DHBs is responsible for organising the provision of health services for its local population in a specific geographical area. They purchase community-based services and provide hospital and some other services through hospitals they own (formally CHEs and HHSs, now called the provider-arm of DHBs).
The DHBs have existed since 1 January 2001 when the New Zealand Public Health and Disability Act 2000 came into force. (Further information on DHBs can be obtained through the Ministry of Health website:
http://www.moh.govt.nz/
GPs
General practitioners (family doctors). GPs are registered medical practitioners who provide community-based, first level general medical care to service users (patients), often referring service users on to other primary care providers for diagnostic services, such as X-rays and laboratory services, for pharmaceuticals dispensed by community pharmacies, as well as for hospital care.
HBL
Health Benefits Ltd. A national organization that manages the payment process for primary care services. Providers fill in claim forms or electronically claim payments that HBL then pays out to providers.
HBL is now part of a group called Health Payments, Agreements and Compliance (HealthPAC). (Further information: http://www.hbl.co.nz or http://
www.moh.govt.nz/healthpac HHSs
Hospital and Health Services The name given to state-owned hospitals between 1997 and 2000.
Previously called CHEs and, from 2001, the provider- arm of DHBs.
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Lessons from New Zealand IPAs
Independent Practitioner Associations. Umbrella organizations representing groups of general practitioners (and sometimes other primary health providers), with whom purchasers negotiate contracts in general practice and primary care.
NGOs
Non-government organizations. Most of these are funded partly by the government and partly privately, often through donations. In New Zealand, the term applies to not-for-profit non-government organizations.
PHARMAC
The Pharmaceutical Management Agency. A Crown- owned entity responsible for managing the New Zealand Pharmaceutical Schedule on behalf of the Crown. (Further information: http://
www.pharmac.govt.nz PHC
The Public Health Commission. Responsible for purchasing public health services between 1993 and 1995, when it was disestablished and the Ministry of Health and the RHAs took over its various functions.
RFP
Request for Proposal. A method used by purchasers to invite providers to tender for services.
RHAs
Regional Health Authorities. Four regional purchasing organizations, in place between 1993 and 1997. In 1997, the four RHAs were merged into one purchaser, the Health Funding Authority (HFA), which existed until December 2000 when its policy functions were transferred to the Ministry of Health and its purchasing functions were transferred to new district health boards (DHBs).
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Contracting for health services13 13 13 13 13
Lessons from New Zealand
Agreements and Contracts – This document has attempted to distinguish, for the clarity and benefit of the reader, between an ‘agreement’ and a ‘contract’. A ‘contract’
is a legally enforceable agreement, and therefore a contract is regarded as legally binding and specifies consequences for a breach of contract, etc; where it is not legally enforceable, ‘agreement’ has been used. The term
‘contracting’, however, has also been used in a generic sense in this document, and basically refers to the process of reaching an agreement between the parties, irrespective of whether a contract or an agreement is the specific outcome of the contracting process.
Base contract – The part of a contract that includes standard terms and conditions, often applying across many providers. Each provider would then have a unique service schedule attached to the base contract setting out service specifications and prices. Schedules could be negotiated more frequently than base contract terms and conditions.
Block budget/Block contract/Block grant – A provider is paid a global/total amount to provide services for a fixed period of time (usually one year).
Capitation – A provider is paid a flat amount for each person registered with them. Capitated payments are usually weighted so that providers receive a higher amount for people with higher needs (e.g. young children, older adults).
Contestable purchasing – Where a purchaser enables a number of providers to tender for a contract to provide services.
Copayments – Charges paid by patients when they obtain a health service. These are charged in primary care for general practitioner services and pharmaceuticals.
The Crown – New Zealand’s head of State is the King or Queen of England, represented in New Zealand by the Governor-General. Thus, the Crown is the term used in New Zealand for the State. However, it should be
G G G
G G LL LLOS L OS OS OSSARY OS SARY SARY SARY SARY OF OF OF OF OF KEY KEY KEY KEY KEY TERMS TERMS TERMS TERMS TERMS
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Contracting for health servicesdistinguished that the State is not the government of the day for the State is politically neutral, but it is the government of the day that makes commitments on behalf of the Crown.
Cultural safety – Where organizations or services are delivered in ways that recognise that people have different understandings and needs depending on their culture. This is particularly important in relation to delivering services to Mäori.
Evergreen contract – A core part of a contract that continues on for many years with little or no renegotiation of clauses. Usually evergreen base contracts contain general clauses pertaining to service delivery and other requirements. They are then accompanied by Schedules that are renegotiated more frequently, usually containing clauses relating to the price and volume of services.
Evergreen base contracts reduce transaction costs by putting ongoing requirements into a contract that does not need to be renegotiated each year.
Funding agreements – Agreements between the Minister of Health and the purchasing authorities.
Funding authorities or Purchasing authorities – Generic terms that refer to RHAs, the PHC, the HFA, ACC and DHBs.
Mäori – The indigenous people of New Zealand.
Relationships between Mäori and the Crown are governed by a Treaty, The Treaty of Waitangi, which gives Mäori particular rights in New Zealand.
Public providers – Publicly-owned providers, that is, AHBs, CHEs, HHSs and provider-arms of DHBs.
Provider-arm of DHBs – The organizational part of a DHB that is responsible for providing health care services.
Purchaser-arm of DHBs – The organizational part of a DHB that is responsible for purchasing health care services for the people in its district.
Purchaser/provider split – The separation of purchasing and provision functions, formerly undertaken by one organization, into separate organizations. Aimed at ensuring agencies have a focus on only one set of activities and at facilitating arms-length contracting and increased competition between providers for contracts.
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Lessons from New Zealand
1.1 Background
New Zealand is located in the south west Pacific region, about 2000 kilometres off the south east coast of Australia.
It has a population of almost 4 million, about 80% of whom are of European (mostly British) descent. The indigenous Mäori people and their descendants make up almost 15%
of the population, while Asians and Pacific Island Polynesians make up 6.6% and 6.4% respectively. The health status of both Mäori and Pacific Island people is generally poorer than that of the rest of the population.
A tax-funded public health system has been in place since 1938. Most hospital services are provided free of charge in a network of state-owned hospitals. There are in addition numerous small private hospitals that provide mainly long-term care for the elderly and privately-funded elective surgery. Doctors and other health professionals working in public hospitals are salaried. Most specialists also work part-time as private consultants on a fee-for- service basis. They have their own separate consulting rooms outside the public hospitals, and use private hospitals or facilities when they need to undertake operations or procedures.
Primary medical services are delivered by general practitioners (GPs, also known as family doctors), mainly on a fee-for-service basis. GP services are fully subsidised by the State for children aged under 6 years and partially subsidised for low income groups and high users. GPs act as the principal gatekeepers for referral to the public hospital
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CHAPTER 1
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Contracting for health servicessystem and to other fully or partially subsidised services such as laboratory tests, pharmaceuticals, physiotherapy and diagnostic imaging. Primary health services are also provided by various allied health professionals such as midwives, independent nurse practitioners and public health nurses. Non-government organizations (NGOs) provide a variety of community-based services including well-child care, disability-support (i.e. social care) services, and various types of consumer support services.1
The public health system has been completely restructured twice over the past decade, first in 1993 and again in 2001. Although some contracting for clinical and non-clinical services took place prior to 1993, the primary focus of this study is on the seven year period between the two rounds of reform. During this period, the use of contracts and agreements substantially increased as the principal way in which public funds could be used to secure services for the public, irrespective of whether a service was provided by a public or private provider.
New Zealand has a separate compulsory social insurance system for funding accident-related care. The Accident Compensation Corporation (ACC) funds medical care for accident-related injuries. ACC has also in recent years established clearer contractual arrangements with providers of health services for accident-related injuries.
1.2 Organization of health services before 1993
Prior to 1993, fourteen area health boards (AHBs) were provided with population-based block budgets to provide secondary and tertiary services and public health services for the people within their geographic areas. Boards were governed by majority-elected members and had a high degree of autonomy. Primary health services and NGOs were funded separately by the Department of Health, the former primarily on a fee-for-service basis and the latter through block grants. Other services, such as long-term residential care, were funded partially through social security subsidies means-tested to the patient, with the same subsidy levels being paid for patients in both for-profit or not-for-profit organizations.
1 Examples include the New Zealand Family Planning Association, the Society for the
Intellectually
Handicapped, the New Zealand Plunket Society (which provides well child services for infants) and the Royal New Zealand
Foundation for the Blind.
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Lessons from New Zealand
During the late 1980s and early 1990s, the government implemented a programme of rapid and significant economic and social reform, the general trend being towards deregulation and a greater reliance on market mechanisms.
Major initiatives included the removal of industrial and export subsidies, and deregulation of the labour and capital markets. In the public sector, state trading departments were corporatised (i.e. turned into profit-focused but still government-owned organizations) or privatised (i.e. sold from public ownership into private ownership). Other government departments were restructured and new accountability mechanisms were introduced. For those entities that remained part of the public sector (notably the government departments), the reforms allowed more autonomy over day to day decisions, but held chief executives more tightly to account with a focus on performance and linking expenditure to agreed outputs.
In line with these public sector reforms, at the end of 1989 a New Zealand Health Charter was introduced, which laid out a set of principles to guide the public health system (Clark 1989). At the same time, a set of New Zealand Health Goals and Targets was published, which identified health status objectives in key areas. From 1990, each AHB was required to sign an agreement with the Minister that specified the range of services they planned to provide, together with a set of performance indicators. The purpose of these agreements was to ensure that the AHBs’ activities were consistent with both the charter and the goals and targets, and to improve the general accountability of the boards. This did not mean that expenditure would be linked to a board’s level of output: while the agreement did include some rather crude measures of particular outputs, most service outputs remained unspecified and unmonitored, and quality measures were absent. Instead the agreements were based on operating plans agreed with the Minister, which were consistent with the boards’ five-year strategic plans. Thus a key objective of this contracting process was to make explicit the planning, as opposed to the actual provision, of services. A board’s performance was then measured against the agreed plan.
The Department of Health also began to draw up more formal contracts with some NGOs. These contracts specified (in broad terms): the relationship between the parties, a broad description of the services to be provided, the price to be paid and manner of payment, and reporting requirements to the Department of Health. Most contracts
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Contracting for health serviceswere block contracts in which levels of provision were specified in terms of inputs – usually the amount of time to be provided by different types of health professionals – rather than outputs. Thus wage rates were effectively set by the government as the purchasing agent. Contracts could then be monitored simply through a review of wage records.
By the end of the 1980s the Department of Health moved increasingly towards the linking of expenditure with outputs in these agreements and contracts in line with the state sector reforms more generally. By 1991/92, both price and volume of services were negotiated with all independent service providers. Volumes were usually determined according to historic trends rather than by any explicit decisions by the Department to shift resources across services. Much of the detail about the nature and quality of service was left to the discretion of the provider.
The Department had neither the information systems nor the resources to monitor effectively the performance of contracted providers.
Change was also taking place in the funding of primary care. Since 1941 fee-for-service subsidies had been paid for GP consultations, pursuant to social security regulations.2 In 1990, the Minister of Health introduced voluntary contracts for GPs, which offered inflation-indexed subsidies for general practice consultations (excluding those related to injured patients, which had been paid for separately since 1971 with the introduction of the ACC scheme). In return, GPs agreed to keep patient copayments below a set of maximum limits, and to provide the government with specific information about utilisation rates within their practice. The General Practitioners’ Association saw the move as an attempt to control their clinical and economic freedom and urged GPs to reject the offer outright. Take-up was slow initially but gradually began to accelerate. By November 1990 when a general election took place it was estimated that almost 10% of GPs had signed contracts. However the election brought a change of government and the incoming Minister of Health immediately abolished these contracts. All GPs returned to the previous non-inflation-indexed subsidy arrangements.
The new Minister also appointed a taskforce to review the structure of the public health system. The recommendations of the taskforce were included in a Ministerial policy statement presented on budget night in
2 A small percentage of GPs choose to have their patient subsidies paid in the form of capitation payments rather than on a fee-for- service basis.
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Lessons from New Zealand
July 1991 (Upton 1991) and the elected area health boards were summarily dismissed. After two hectic years of preparation, the restructured system was introduced in July 1993.
1.3 The 1993 reforms
The recommendations of the taskforce were in line with the market-oriented reforms that had been taking place in the wider economy. The central feature of the restructuring was the establishment of “buyers” and “sellers” through the separation of the roles of purchasing and providing services. The main objectives of the restructuring were to improve the efficiency, flexibility and innovation of health care delivery; reduce waiting times, and widen the choice of hospitals and health services for consumers (Upton 1991).
The Department of Health became the Ministry of Health3, its focus to be on policy development. On the purchaser side, four Regional Health Authorities (RHAs) were set up to purchase all primary, secondary and tertiary health and disability support (i.e. social care) services. In effect, this meant that all government funding for personal health services was integrated into a single budget, and that this budget was capped, including the previously open-ended
Figure 1: Structure of the Public Health System Before 1993
3 For further information about the Ministry of Health and the New Zealand health sector, please refer to:
http://www.moh.govt.nz Accident
Compensation Corporation (ACC)
Department of Health
Department of Social Welfare
Long-term residential care 14 Area
Health Boards
NGOs Primary health
care providers (GPs, etc) Private specialists
and private hospitals;
various support services for injured people
Fee-for-service subsidies
Population- based funding
Patient subsidies Price and
volume contracts
Providers:
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Contracting for health servicesfee-for-service primary care payments. The funding for public health services was “unbundled” (i.e. separated out) from the old area health board budgets and a separate purchaser, the Public Health Commission (PHC), was established to purchase these services. However, the Public Health Commission was abolished after only two years in existence.
Its roles were transferred to the RHAs and to a Public Health unit within the Ministry of Health.
The original intention had been for the RHAs to take over responsibility for purchasing all ACC services (i.e.
medical care for accident-related injuries). However, because the ACC also insures against income losses incurred as a result of an accident, it wished to maintain control over purchasing these services so as to ensure timely intervention, especially surgery, following an accident.
Therefore ACC retained the right to buy services for injured people, and in addition ACC contributes to the costs of emergency care of injured people treated in public hospitals, through an annual payment back to the Crown for the estimated costs of this care.
On the provider side, the services previously provided by the 14 AHBs were reconfigured under 23 Crown Health Enterprises (CHEs) which were to contract with RHAs and the ACC to provide services alongside private hospitals and other private providers. CHEs were structured as for- profit companies and, under the Health and Disability Services Act 1993 (section 11), were required to “be as successful and efficient as comparable businesses that are not owned by the Crown”. All contracts were intended to be legally binding, including those between the public purchasers and public providers (i.e. CHEs).4
The separation of responsibilities between purchaser and provider extended up to the ministerial level, with the public purchasers being accountable to the Minister of Health and public providers (CHEs) being accountable to the Minister of Crown Health Enterprises. The Crown’s interest in the CHEs was vested in two shareholding ministers – the Minister of Finance and the Minister of Crown Health Enterprises. Political control was therefore separated into purchasing responsibilities through the Minister of Health, and ‘ownership’ responsibilities (ensuring CHEs operated as successful businesses) through the Ministers of Finance and Crown Health Enterprises. Each CHE had a board of directors appointed by the shareholding ministers.
4 The legislative framework is described in detail in Chapter 2.2.
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Lessons from New Zealand
Private providers that contracted with purchasers for the provision of publicly-funded services included primary health providers as individuals or in group practices (general practitioners, pharmacists, community laboratories, dentists, etc.); NGOs; providers of long-term care for the elderly (i.e. rest homes and private geriatric hospitals);
independent private specialists; and private hospitals. These providers could contract with the purchasers directly or via an umbrella organization, or sub-contract through other providers, especially CHEs.
1.4 Adjustments in 1997-1998
Some changes to this basic structure were made following another general election at the end of 1996, when the National government was returned to power, but with far fewer votes and only through the formation of a coalition government. The purchaser/provider split was retained, but any emphasis on what remained of competitive
Figure 2: Structure of the public health system 1993
(*Note: ACC continued to make a number of fee-for-service payments, pursuant to Regulations, where contracts were not put in place with providers.)
Community-based providers (NGOs, GPs, etc.) 23 Public Providers
(CHEs) Private Hospitals
and specialists Accident Compensation Corporation (ACC)*
Public Health Commission (PHC) 4 Regional Health
Authorities (RHAs)
Minister of Health
Providers:
Purchasers:
Contracts
Annual funding agreements
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Contracting for health servicescontracting was removed. The four RHAs were disestablished in 1997 and replaced by a temporary organization (the Transitional Health Authority) to facilitate the merging of RHA purchasing responsibilities into a single national purchasing organization, the Health Funding Authority (HFA). The purpose of this was both to reduce the costs of contracting and to reduce regional inequities.
The CHEs were also reconfigured into not-for-profit organizations called Hospitals and Health Services (HHSs) (still government-owned). The intention here was for the
“principles of public service to replace commercial profit objectives” (Coalition Government 1996). However the HHSs still provided the same services and were still required to perform financially in the same way as not-for-profit private companies.
1.5 Reforms of 2000
At the end of 1999, following a general election, a new Labour-led coalition government came into power. The coalition partners were philosophically opposed to competition in the health sector and public confidence in the public health system was very low. A major policy plank of the Labour party was therefore to abandon what remained of competitive contracting for services between purchasers and providers and to return to democratically- elected local health boards.
The HHSs were therefore restructured into 21 District Health Boards (DHBs) which formally came into existence on 1 January 2001. The HFA was abolished in December 2000 and its roles were transferred to either the DHBs or the Ministry of Health. The DHBs will (from July 2003) be funded on a weighted population-basis, their role being either to purchase or to provide government-funded health services for a geographically defined population (Ministry of Health 2001). Thus while the purchaser/provider split has been abolished for services that are publicly-owned, the DHBs still purchase services from non-government providers through contracts. The Ministry of Health has initially retained responsibility for purchasing some services (such as public health services and disability support services). However the intention is to devolve responsibility for all services to DHBs over time. Medical care provided in hospitals for accident-related injuries will continue to be purchased separately by the ACC.
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Lessons from New Zealand
2.1 Introduction
The ongoing changes that occurred in the structure of the New Zealand health system during the 1990s created a rather unstable contracting environment. The introduction of the purchaser/provider split in 1993, and the replacement of the four RHAs by the HFA in 1997/98, both resulted in changes of personnel in key positions, a breakdown of many established personal relationships, a loss of contracting skills and institutional knowledge and, most importantly, the introduction of new purchasing strategies.
Contracting for health services in New Zealand has therefore featured a range of different approaches with national consistency across regions and across services gradually increasing over time.
Key factors that shaped the contracting environment and the processes within it were: the legal framework, funding constraints, and the cultural and professional norms of contracting personnel. While some of these personnel were people who had previously worked in the public health system (including some clinical staff) the new structures also brought in a new layer of management and legal personnel from the private sector, thus bringing a more commercial orientation into the health system.
2.2 The legal framework for contracting
The structure put into place in 1993 was governed by the Health and Disability Services Act 1993. The primary effect, in legal terms, of the Act was to formalise the
T T T
T T HE HE HE HE HE CONTRACTING CONTRACTING CONTRACTING CONTRACTING CONTRACTING PROCES PROCES PROCES PROCES PROCESS SS SS
CHAPTER 2
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Contracting for health servicespurchaser/provider split and to give independent legal status and contractual capacity to the new purchasing and providing agencies. The RHAs were established as separate legal entities from the Ministry of Health. Public hospitals became state owned enterprises incorporated under the Companies Act – the same legislation as governs privately- owned companies in New Zealand. Political controls were placed at a distance from purchasing decisions (ministerial objectives were set via funding agreements), and at arm’s length from service provision so that shareholding ministers would have input only via statements of corporate intent (i.e. business strategies developed by the public providers and signed off by the shareholding ministers).
The Minister of Health signaled key health objectives and other requirements to purchasing authorities through statements of objectives (called funding agreements). In certain circumstances such agreements could have been construed as contractual in a legal sense, but the relationships between the Minister and the purchasing authorities were in fact primarily political. Any disputes were resolved politically and with little public discussion. In contrast, the relationships between the purchasing authorities and providers of health and disability services were, at least initially, primarily legal ones. The Health and Disability Services Act required that those relationships should be governed by contractual mechanisms. Such contracts had full legal status, could be enforceable in the Courts, and were subject to New Zealand’s general competition law controls in the Commerce Act 1986.5 The ordinary private law of contract was to be the primary mechanism of accountability and control and the purchasers were to monitor performance of the agreements.
The Health and Disability Services Act (section 40) also included the requirement that the public providers must provide a service if instructed to do so by the Minister, even if there was a dispute over the price paid for that service. The purpose of this was to ensure the provision of essential services in the event that other providers could not, or would not, provide them.
The Commerce Act 1986, as it applied at that time, had important implications for the health sector. It rendered invalid any clauses in contracts that had the purpose of substantially lessening competition in the market. It was irrelevant for the purposes of the Act whether that was the effect of such clauses. In particular, contractual clauses
5 The Commerce Act provides for a number of potential regulatory interventions to control the inappropriate use of monopsony or monopoly power and/or to promote competition. It applies across all sectors of the economy, and gives power to an indepen- dent Commerce Commis- sion (refer to http://
www.comcom.govt.nz/) to take action against anticompetitive behaviour by any seller or buyer. The RHAs were exempt from this Act only for the first year of their operation.
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Lessons from New Zealand
fixing, controlling, or maintaining prices were deemed substantially to lessen competition. Also of particular relevance to the health sector, the Commerce Act invalidated contractual clauses that were the product of two or more persons who were in competition with each other acting together for the purpose of restricting the supply or acquisition of goods or services (section 29). This provision impacted both on attempts by the RHAs to work together to contract for services and on providers’ attempts to cooperate. They were each able to avail themselves of the exceptions in the Commerce Act although, in practice, a wider range of exceptions was available to providers than to the purchasers. The exceptions allowed entities to incorporate, form joint ventures or to cooperate in groups of 50 or more. The 4 RHAs were able to avail themselves of an exception by incorporating the Pharmaceutical Management Agency (PHARMAC) as a vehicle for making pharmaceutical subsidy decisions for all 4 RHAs. Providers had additional vehicles for collective action, being able to form, for example, Independent Practitioner Associations (IPAs) and umbrella groups through which to consult with purchasers.
The Health and Disability Services Act 1993 also provided a mechanism for the use of standard form contracts (section 51 of that Act). Section 51 allowed for the purchaser to specify terms and conditions without the agreement of, or prior negotiation with, any particular provider. These terms and conditions could be notified to individual providers or published generally. If a provider accepted any payment for specified services notified under a Section 51 notice, then the provider was deemed to have accepted those terms and conditions, and the Act deemed these arrangements to be contractual. This was used primarily to regulate relationships with GPs in the delivery of primary care, particularly in the initial stages of implementing the purchaser/provider split in 1993, because the previous legislation that enabled payments to general practitioners was repealed when the Health and Disability Services Act was passed into law.
The Health and Disability Services Act also placed a number of requirements on the purchasing authorities that later impacted on contracting. The most obvious was in relation to requirements for purchasing authorities to consult with communities about which services to provide.
Such consultation is taken seriously in New Zealand, for
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Contracting for health servicesthe Courts have found against those organizations that have not adequately consulted, or where there has been only token consultation.
Other relevant legislation
Other legislation that was not introduced specifically as part of the 1993 health reforms but which had some relevance for the contracting process includes:
• The Public Finance Act 1989. This includes financial reporting requirements that apply to both the purchasers and publicly owned providers. The Office of the Controller and Auditor General6 exercises authority under the Act. It has the power to monitor the contracting practices of any organization that is owned by the Crown and regularly reports on health contracting issues.
• The Ombudsmen Act 1962 and the Official Information Act 1982. The Ombudsmen7 exercise a complaints jurisdiction and monitoring role over
“matters of administration” for the whole of Government, and this includes those health organizations that are owned by the Crown. Their role is to ensure that public decision making processes are fair. The Ombudsmen also oversee issues relating to official information, with the Official Information Act aimed at ensuring that information pertaining to government is reasonably accessible.
• The Health Information Privacy Code governs the collection and use of health information. The Privacy Commissioner8 exercises jurisdiction over the health information privacy code.
• The Code of Health and Disability Services Consumers’ Rights. The Health and Disability Commissioner9 hears complaints about standards of services actually delivered and about breaches of the Code. The Commissioner has no jurisdiction over issues of what services should be funded, however.
6 For further information, please refer to: http://
www.oag.govt.nz/
7 For further information, please refer to: http://
www.ombudsmen.govt.nz/
8 For further information, please refer to: http://
www.privacy.org.nz
9 For further information, please refer to: http://
www.hdc.org.nz/
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Lessons from New Zealand
2.3 Purchasing methods
The annual funding agreements that each of the purchasers (the four RHAs and the PHC) signed with the Minister were based upon a set of Crown objectives. These Crown objectives included:
• six principles upon which purchase decisions should be based: equity, effectiveness, efficiency, safety, acceptability, and risk management
• four health gain priority areas (child health, Mäori health, mental health and physical environment health)
• a set of service obligations, which defined, in very broad terms:
- the range of services to be purchased
- coverage and/or terms of access to these services - standards for safety and quality.
Chapter 3.5 discusses the role these objectives played in contracting.
In addition, each purchaser was required to adhere to a set of Policy Guidelines drawn up annually by the Minister of Health (Upton 1992; Shipley 1994, undated-a, undated- b). Again, these were very broad guidelines that described some elements of the purchasing process. They included, for example, the purchasers’ relationships with other public organizations, some implementation strategies (including strategies for quality improvement, provider development and exit by Public Providers10), and the monitoring and accountability requirements of the purchasing organizations.
While the Policy Guidelines provided some direction on the broad approaches to purchasing, purchasers were given very little assistance on how to go about purchasing services through contracts. For example, there were no national guidelines on how detailed service specifications should be for contract purposes, how to set prices, or how and when it might be appropriate to use contestable purchasing strategies. The RHAs and the PHC therefore had considerable freedom to set their own service priorities and to negotiate contracts and set reimbursement mechanisms as they saw fit. Thus each of the purchasers developed its own purchasing strategy.
10 Throughout the 1990 – 2000 reform period, the name of the public organizations (which provide hospital services, community services and some public health services) has changed four times from Area Health Boards (to 1993), to Crown Health Enterprises (1993 – 1997), to Hospitals and Health Services (1997 – 2000) and finally to the provider arm of the District Health Boards.
To avoid confusion, these organizations will be referred to as Public Providers throughout the remainder of this report.
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Contracting for health servicesThe tendency of the RHAs in the first couple of years was to look to commercial models of contracting for guidance. This resulted in very lengthy processes (sometimes as long as two years) in drafting contracts. It also resulted in styles of contracting that were often characterised by vigorous bargaining and adversarial relationships, especially with respect to the Public Providers where there were tight funding constraints. Contract negotiations were therefore more prolonged than had been anticipated and many providers continued to provide services, sometimes for some considerable length of time, without having signed any formal contract. The Ministry of Health attributed these delays in the contracting process to a number of factors including a slow start to the contracting process as RHAs established themselves and their procedures; a lack of cooperation in purchaser/provider relationships; and difficulties in service specification (Performance Monitoring and Review undated).
The approach to contracting changed somewhat following the replacement of the four RHAs with a single purchaser, the HFA. The HFA pursued a more relational style of contracting, working more closely with key provider groups to develop standard terms and conditions that could be applied nationally across a wide range of providers.
Contracting with Public Providers
In the first year (1993/94), roll-over arrangements applied for all of the Public Providers, with funding and service levels being based upon historical trends to allow for a settling in period. The Midland and Northern RHAs then adopted a two-stage approach to contracting for services provided by the Public Providers, with separate contracts being negotiated for each individual service. A base contract, which set out standard terms and conditions, was negotiated first. Once this had been agreed, a set of service schedules specifying volumes and prices was then negotiated.11
The other two RHAs adopted a one-stage approach with details of the volumes and prices of individual services being specified either within the body of the main contract or as separate schedules. While the method of negotiation differed, the general outcome of these two approaches appeared to be very similar. For example, in all contracts there was some duplication and cross-referencing between
11 Further details of the content of each section of the contracts are provided in Chapter 3.2.
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Lessons from New Zealand
the different parts of the contracts. In the Northern RHA where the base contracts were quite lengthy, the two- stage approach often resulted in long delays before the service agreements could be signed.
The establishment of the HFA in 1997/98 accelerated the trend towards greater national consistency in both service definitions and prices. The HFA developed (in consultation with providers) a National Service Framework that defined a common set of contract terms and conditions, service specifications, and a national pricing schedule based upon the estimated cost of “efficient” service provision. This standardisation of contract terms and conditions enabled Public Providers to sign up to a single base contract, with a set of schedules for each service.
Contracting with primary health care providers
One of the objectives of the purchaser/provider split was to control public spending on primary health services, which had historically been paid for on an open-ended, fee-for-service basis. Because the purchasers received a fixed amount of funding (i.e. they had “capped” budgets), they had a strong incentive to cap expenditure by providers.
However Section 51 of the Health and Disability Services Act effectively allowed existing non-contractual fee-for- service payments to GPs and other primary health care providers to continue as before, until RHAs were able to negotiate specific contracts (see section 2.2 above).
Contracting for many primary health care services therefore tended to develop relatively slowly, with a majority of primary health care providers continuing to operate under Section 51 agreements outside of the contracting regime.
Although some GPs volunteered to move to capitation payments, only one of the four RHAs made a concerted effort to encourage its general practitioners to accept capitation-based contracts. GPs in that region also expressed a willingness to move to a capitated payment regime. This one RHA and the GPs in that region were therefore able to work through the issues together in partnership, developing a pilot scheme that was acceptable to both parties. Other regional purchasers were less collaborative.
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Contracting for health servicesThere were considerable delays in signing some of the contracts, and as a result rollover contracts (i.e. contracts with the same terms and conditions as previously agreed, which continue on with no new negotiations) or arrangements under Section 51 of the Health and Disability Services Act 1993 were sometimes in place for many months. Some GPs had no formal contract of any sort and so were continuing to provide services for a long time after their Section 51 agreements had expired.
Many GPs joined newly-established Independent Practitioner Associations (IPAs) which negotiated on behalf of GPs and which, as umbrella groups, helped to counter the imbalance in bargaining power between the GPs and the RHA as a single purchaser. Many of these IPAs negotiated
“budget-holding” contracts that provided them with a pool of funds to cover the costs of some of the referred services prescribed by their members. Most of these budget-holding contracts covered only pharmaceuticals and/or laboratory services, but some also included related services such as practice nurse services, community nursing services, and minor elective surgical procedures.
Unlike the UK, where GP fundholding developed in a particular format following national guidelines, in New Zealand these budget-holding contracts were subject to few special regulations or guidelines. Each RHA was therefore free to negotiate with providers on such things as the setting of budgets, the size of budget-holding organizations, the coverage of budgets, or the use of savings. Although the intention was to move towards formula-based budgets as soon as possible, all RHAs calculated budgets according to historical expenditure. This was by necessity rather than by design, because only a minority of GPs had patient registers upon which capitated budgets could be based. Only one IPA carried the risk of overexpenditure. In all other cases, the risk stayed with the RHAs. However, in most (if not all) cases, savings (rather than losses) were made from these budget-holding contracts. These savings were usually shared between the purchaser and the provider, with use of the savings by providers being negotiated with the purchaser.
The move away from rigid, regulation-based fee-for- service payments that were only accessible by GPs (who are medically qualified) to contracts allowed new types of providers to bid for contracts. This was especially important for Mäori providers and other community-based
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Lessons from New Zealand
organizations who wished to provide services that had not traditionally been publicly funded, or services that were more focused on prevention than on individual treatments.
This also enabled some community-based organizations to engage GPs as their employees, to provide services in line with the organization’s priorities, rather than having to have the GP as the principal party who collected subsidies for services rendered.
Contracting with non-government organizations (NGOs)
Contracting for services proved difficult for many NGOs (Performance Monitoring and Review undated). As not-for- profit organizations, which are often dependent upon voluntary donations and volunteer labour, they often did not have the information necessary to specify services in any detail or to determine service prices and volumes. They also often did not have the commercial orientation, the skills or the money to participate in a contestable contracting process.
The larger NGOs that provided services nationally found themselves negotiating with four different purchasers, each of which had a different approach to purchasing. This was not only costly in terms of contract negotiations. It also sometimes resulted in a single organization having to develop different quality measures and adhere to different information requirements in the different regions.
Contracting for public health services
The PHC, which was responsible for purchasing public health services between 1993 and 1995, developed its own purchasing strategies. Soon after its establishment it undertook a major consultation exercise on the strategic direction for public health. It then developed a set of national goals, objectives and targets, which guided its purchasing decisions (Public Health Commission 1994).
For services provided by the Public Providers, the PHC negotiated agreements with the RHAs to manage these contracts. However the PHC negotiated directly with providers for national services, and also for some services provided by smaller, private organizations. It generally issued Requests for Proposals (RFPs – see section 2.5)
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Contracting for health servicesfrom providers. However, this appears to have been more a response to the need to comply with the Commerce Act than to any perceived need to introduce a competitive element into the contracting process. Even so, the process unsettled some incumbent providers. It also imposed high costs on smaller providers who did not have the capacity to undertake a lot of extra paperwork.
2.4 Setting prices
For most services there was little real “negotiation” over prices. The usual process was for the purchaser to set a price. Where providers had few competitors (as was the case for many of the services provided by Public Providers), providers could attempt to negotiate a higher price. However this often resulted in protracted and costly negotiations.
The purchasers were constrained by their fixed annual budgets and there was often a gap between what was judged to be a fair price and the money that the RHAs had available. This caused considerable anguish for some providers, especially Public Providers who were required to manage the associated risk. Their financial deficits generally increased accordingly.
As separate purchasers, the RHAs were required (under the competition-promoting provisions of the Commerce Act) to set their own prices for the services that they purchased. They did, however, undertake some inter- regional comparative work to inform the price-setting process and sometimes looked to international price-setting regimes for benchmarking purposes.
Where there were many providers, some purchasers chose to vary the price according to the perceived quality of individual providers. In the case of rest homes, for example, one purchaser negotiated a price per patient day with each individual provider; another specified a narrow band within which the standard price that they were willing to pay per patient day might vary.
2.5 Contestable purchasing strategies
Although purchasers sometimes used the threat of contestable purchasing as a lever for keeping prices down, in practice, the vast majority of contracts were placed with
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Lessons from New Zealand
incumbent providers (see section 2.6 for more on this point). Situations where contracts were made contestable included:
• where there were many providers and some surplus capacity (e.g. rest home services)
• where the purchaser wished to buy additional volumes on a spot contract basis (e.g. elective surgery)
• where there was money for a new service (e.g.
community-based mental health services)
• where an existing provider was not providing an adequate quality of service.
In cases where there was money for new services, the purchasers would first consider how the money should be spent by reviewing their strategic plans and the Crown’s objectives. The usual approach to contestable contracting was then a two-step process. First, the purchaser would call for expressions of interest. The purchasers all developed lists of potential providers for this purpose, plus they maintained a wide network of personal and professional contacts. The purchaser would then refine its purchase requirements and issue a Request for Proposal (RFP), inviting any interested parties to submit more detailed proposals. These RFPs were then evaluated by the purchaser according to a defined set of criteria covering dimensions such as quality of service provision and availability of support services as well as price.
Although the evaluation criteria were made available to providers, this information did not initially include the amount of money available for the service. Therefore providers sometimes spent a lot of time and money submitting proposals that could not be funded. However this changed under the HFA (and also the PHC) who announced how much money they had available for each new service.
The RHAs had different views about the use of contestable purchasing strategies for services that had traditionally been supplied by the Public Providers. The Northern RHA felt that, as a general rule, for existing services, including elective procedures, it was preferable to defer opening up contracts to alternative providers until the Public Providers were better established. In the northern region therefore, any contestable purchasing of services
